WHAT SHIPOWNERS, REFINERS, AND TRADERS SHOULD KNOW ABOUT IMO 2020 - MCKINSEY
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Oil & Gas Practice
What shipowners, refiners,
and traders should know
about IMO 2020
New global limits on sulfur content for marine fuels will have a signifi-
cant impact on fuel markets. Our forecast for 2020 shows the biggest
challenge will be overcoming uncertainty.
by Emily Billing and Tim Fitzgibbon
©Suriyapong Thongsawang/Getty Images
November 2019Despite early talk of a possible delay, IMO Lagging scrubber installation
2020 will take effect on January 1, 2020.¹ Once Shipowners were reluctant to install scrubbers
implemented, global bunker fuel will be limited before mid-2018 because of both the financial
to 0.5 percent sulfur content unless ships have viability and the logistics of the installation
scrubbers installed, far lower than the current limit process. However, installation gained strong
of 3.5 percent. An additional carriage ban, which momentum during the second half of 2018 and
prohibits ships from carrying fuel oil with a sulfur the first half of 2019. The order book increased
content greater than 0.5 percent unless they have from approximately 1,600 scrubbers in September
scrubbers, will go into effect on March 1, 2020. 2018 to about 3,700 scrubbers in September
Ships in regions with sulfur emission control areas 2019 (Exhibit 1). The resulting economies of scale
(SECAs), such as Europe and North America, are have made scrubber economics more favorable,
already required to meet an even stricter sulfur with payoff periods ranging from one to three
limit of 0.1 percent; therefore, IMO 2020 will have a years for a large ship with a light-heavy differential
smaller effect on shipowners in these regions. of between $15 and $23 per barrel.² In addition,
limited shipyard space has not yet bottlenecked
The new regulations will reshape fuel markets, shipowners in installing scrubbers, though it could
especially in the short term. We’ve summarized still become an issue as momentum picks up.
analyses of recent trends to create forecasts
for how shipowners might respond in two areas: Our forecast assumes approximately 3,000
scrubber installation and fuel switching. Scrubber scrubbers will be installed by 2020, accounting for
installation has only recently gained momentum, and nearly 800,000 barrels per day of high-sulfur fuel
this slow start means that IMO 2020 compliance will oil (HSFO). This includes both open-loop scrubbers,
initially rely on switching to very-low-sulfur fuel oil which cost less yet discharge waste into the water,
(VLSFO) or marine gas oil (MGO). Fuel switching and and closed-loop scrubbers, which capture waste
the additional demand for lower-sulfur fuels will also but also require waste removal. While there have
lead to changes in the global refining market, which been debates on banning open-loop scrubbers in
can expect higher refinery utilization in 2020. coastal waters, the overall effect on fuel demand
would be minimal: a less than 5 percent reduction
Of course, shipowners’ decisions in the coming in HSFO demand. In fact, ships could simply comply
months will directly affect refiners. As the with coastal regulations by using MGO and then
implementation date gets closer, the primary switch to open-loop scrubbers after leaving
challenge for traders and refiners will be overcoming coastal areas.
widespread uncertainty about how to move forward.
The traders and refiners able to create the most Given more concrete guidelines for fuel oil
value will carefully consider their strategic options, nonavailability reports and carriage bans, we
including producing more VLSFO, taking advantage assume that noncompliant ships (those that burn
of existing bunkering businesses, focusing on HSFO without scrubbers) will represent just
trading and wholesale marketing, investing in 8 percent of the total bunker demand in 2020.³ That
scrubbers or power generation to diversify, or number is expected to drop to less than 5 percent
increasing storage. by 2025.
1
nnex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL), administered under the International
A
Maritime Organization.
2
The light-heavy product price differential is a measure of price differences between light products (such as gasoline and diesel) and heavy
fuel oil.
3
This is slightly lower than the previous year’s assumption of 10 percent in 2020.
2 What shipowners, refiners, and traders should know about IMO 2020IMO 2020
Exhibit 1 of 3
Exhibit 1
Scrubbers gained strong momentum during the second half of 2018 and the first half of 2019,
increasing the volume of high-sulfur fuel oil retained in bunker demand in 2020.
Number of scrubbers in place by 2020¹
Firm order book
4,500
4,000
3,701 (Sept 2019)
3,500 3,502 (June 2019)
3,000 3,018 (Mar 2019)
Our outlook assumes 3,000
scrubbers installed by 2020, which 2,649 (Jan 2019)
2,500 equals ~800 kbpd of HSFO,² or
~16% of current bunker demand.
2,127 (Nov 2018)
2,000
1,618 (Sept 2018)
1,500
1,000
500
0
FGE CE Delft/ DNV GL Goldman Wood Evercore UBS SEB Goldman BIMCO
IMO (June ’19) Sachs Mackenzie Sachs
’16 (Sept ’18) (May ’18)
Companies and organizations
¹ Unless indicated, forecasts published between April 2018 and March 2019.
² High-sulfur fuel oil; assuming each ship with a scrubber consumes 15 kMT of fuel (60 tons per sailing day over 250 sailing days), total HSFO consumed by ships with
scrubbers is ~800 thousand barrels per day (kbpd).
Source: DNV GL (order book information)
Balanced fuel switching problems.⁴ Refiners will therefore be required to
Given the projected level of scrubber investments, make this new blend of fuel oil with a sulfur content
IMO 2020 compliance will have to rely mostly on of 0.5 percent. Many refiners have already been
switching fuel to either to VLSFO or MGO—at least developing and testing these new fuel oil blends
initially. The actual mix remains to be seen, but we ahead of the regulation’s start date to work on
expect a significant amount of both fuels. engine compatibility and consistency concerns.
VLSFO will be priced lower than MGO but may As several issues will not be fully resolved by the
be riskier in terms of engine compatibility and start of 2020, we expect the first few months
bunkering availability, especially if shipowners after the transition to be volatile. Shipowners
aim to stick to a single brand. The concern among will therefore move between VLSFO and MGO,
shipowners regarding VLSFO is that mixing different depending on their level of comfort or concern
VLSFOs from different producers can block filters about the new fuel quality and relative price levels.
and transfer lines, leading to serious engine
4
LSFOs from individual refiners can be stable in themselves but lead to sedimentation when combined with VLSFOs from other producers.
V
Paraffinic molecules in lighter fuel oil blend stocks can result in precipitating asphaltene molecules out of liquid fuel oils at different
concentration levels depending on the origin and grade of the crude.
What shipowners, refiners, and traders should know about IMO 2020 3However, as these issues are resolved, we expect High-sulfur bunker demand currently makes up
shipowners to favor VLSFO as the low-sulfur fuel almost 50 percent of total global residual fuel oil
to comply with MARPOL, shifting the VLSFO– demand. And global bunker demand is 70 percent
MGO split from roughly 50-50 in 2020 to 75-25 in HSFO, 28 percent diesel or MGO, and 2 percent
2025 (Exhibit 2). That said, MGO will still be used other fuels (such as LNG, gasoline, or kerosene).
in SECA regions to meet their 0.1 percent sulfur limit,
representing roughly 1.4 million to 1.6 million barrels Shifting bunker fuel demand from HSFO to a
per day of MGO demand through 2035. combination of VLSFO and MGO will increase overall
oil demand in the short term while severely cutting
Although alternative fuels, such as liquefied natural demand for HSFO. In turn, increased MGO or
gas (LNG), are being introduced to the marine VLSFO demand by shipowners will increase crude
bunkering market, they will continue to make up only runs by 250,000 barrels per day. As a result, all
a small share of total fuel demand because of limited regions will experience higher refinery utilization,
infrastructure support. pushing markets to simpler marginal configurations
McKinsey EPNG
and higher margins in 2020. Cracking margins
IMO 2020
Impact of compliance on fuel markets across regions will see a boost in 2020 due to
Exhibit 2 of 3
and refiners increased growth in distillate demand. And more
IMO 2020’s changes to the bunker fuel market complex refining processes, such as coking, will see
can potentially affect fuel oil markets overall. an even higher jump (Exhibit 3).
Exhibit 2
Given these factors, MARPOL provides a temporary boost in gas oil demand in 2020, but gas
oil will gradually lose market share to very-low-sulfur fuel oil and liquefied natural gas in the
reference case.
Global bunker fuel demand mix, reference case
Million barrels per day
HSFO¹ VLSFO² MGO³ LNG⁴
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0
2016 2020 2025 2030 2035
¹ High-sulfur fuel oil.
² Very-low-sulfur fuel oil.
³ Marine gas oil.
⁴ Liquefied natural gas.
Source: McKinsey Energy Insights, Global Downstream Model
4 What shipowners, refiners, and traders should know about IMO 2020IMO 2020
Exhibit 3 of 3
Exhibit 3
Refiners will benefit from higher margins in 2020 as a result of MARPOL.
Refining margins by hub (variable cash), $ per barrel
Europe FCCV ¹ USGC FCCA² Singapore RCC³
History Forecast
12
10
8
6
4
2
0
2010 2015 2020 2025
¹ Brent delivered to Rotterdam.
² Vasconia delivered to Houston.
³ Dubai delivered to Singapore.
Source: McKinsey Energy Insights, OilDesk model; Platts
With higher MGO demand, the global refining generation. HSFO will then price at substitution
market will be tighter for diesel and result in more economics versus natural gas, which will lower resid
excess gasoline in the short term. There will be a prices and widen the light-heavy differential.
higher premium for diesel from 2020 to 2022, as
diesel–gasoline spreads widen initially and then Finally, additional refinery capacity, increased
return to levels indicating a more balanced market supply of VLSFO, and greater installation of
after a few years. scrubbers will all eventually contribute to a more
stable market. While refinery utilization and
Combined with higher crude runs, the loss of margins will be higher in 2020, they will start to dip
HSFO demand from bunkers will send the global in 2021 as capacity additions and slower demand
residual fuels market into oversupply in 2020 and growth start to offset the initial MARPOL impacts.
2021, forcing excess resid to find a home in power
What shipowners, refiners, and traders should know about IMO 2020 5Strategic opportunities for traders conversion and hydrotreating they have, as well as
and refiners their current production of LSFO.
Despite changing fuel markets and increased
regulations, MARPOL presents strategic Simple refineries, such as those with low conversion
opportunities for traders and refiners in the next and limited hydrotreating, will have the option of
few years. Those able to identify and secure demand either shifting the crude slate to reduce HSFO
can create a competitive advantage, particularly production or finding the best home for the HSFO
in 2020. they continue to produce. Shifting to crude that is
lighter, sweeter, or a combination of both should
Players with strong trading and wholesale marketing not be difficult; however, prices for premium
can benefit from an ability to blend low-sulfur resid grades will rise as players compete to produce
and make VLSFO. However, making VLSFO will VLSFO, resulting in more demand for light sweet
require additional tankage and higher logistical crudes. This suggests that the strategy of shifting
costs as low-sulfur streams must be segregated crude slate will at best be value neutral. Refiners
from high-sulfur streams. Traders and marketers that continue to make HSFO will need to find the
able to find a home for high-sulfur resid will also best available home for it—likely requiring active
have an advantage. Companies with bunkering development of new customers, such as switchable
capabilities will have the opportunity to gain new power users, that have not been consuming HSFO
customers, as shipping companies are expected now but may switch based on favorable economics.
to favor a specific company or brand across the Another alternative could be to segregate heavy,
globe to avoid compatibility problems. However, high-sulfur resid and sell to a refiner with spare
such consolidation will require fuel to be consistent conversion and hydrotreating capacity under a
across facilities. term agreement.
Refiners that have made conversion investments, More complex refineries have the same options as
specifically in coking and hydrocracking, should simple refineries—as well as the potential to reduce
see higher profits in the early 2020s. Given the lead the production of HSFO by taking advantage of
time on these types of projects, recent and current their flexibility from the conversion capacity. To the
investment decisions will likely see little benefit extent possible, all complex refiners should try to
from MARPOL. At the same time, traders or refiners maximize the utilization of conversion and capability,
could see opportunities to diversify investment in capturing value from a combination of reduced
competing sectors, such as in scrubbers or power HSFO production; increased VLSFO production; or
generation. Last, investing in storage capacity may the use of heavier, high-sulfur crude, which will see
be a good move to potentially manage higher MGO a price discount. Investing to increase conversion
demand, more diverse fuel supplies with different or hydrotreating, other than through very quick
resid, or MGO blends. and inexpensive debottlenecking, will likely not be
feasible for refiners over the next few years. Beyond
The opportunities and challenges for refiners will that, the likelihood that the market effect of IMO
depend on their configuration, such as how much 2020 will go away is quite high.
Emily Billing is a consultant in McKinsey’s Houston office, where Tim Fitzgibbon is a senior expert.
Copyright © 2019 McKinsey & Company. All rights reserved.
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